Ketogenic diets are of questionable benefit unless done for medical reasons (Such as an attempt to control epilepsy). Studies of ketogenic diets have had very mixed results.
If you only eat 160g of protein, that is a daily intake of 640 calories, which is borderline starvation diet. That isn't really a desirable outcome either. Fat is essential, but if you keep eating ~ 1600 calories a day of fat, you're going to have other health problems. Consuming that much fat will start to result in other conditions, especially if done for a prolonged period of time.
Metabolism is not a 1:1 relationship, i.e. if I don't eat 200g of fat, my body will take 200g of fat to make it up from stores. The body basically decides what and where it will take from to get the nutrients and energy that it needs. If it opts to take it from muscle, it will. All that you will do if you eat nothing but protein is force your body to take what it needs from where ever it can find it.
Studies have shown many times that the type of diet is almost irrelevant, whether it's Atkins, South Beach, grapefruit, ketogenic, whatever. Simple calorie restriction is the single most important factor.
Eat a healthy diet of varied elements (Shop the edges of the store), ensure you get enough protein and keep the 10-20% calorie reduction, and you will see desirable results. Given that you are weighlifting, that may be higher than BMI charts (Which are notoriously unreliable for athletic/muscular bodies) say you should be, but let the mirror and your health be the best guide.
Given the question regarding the Inuit diet which is routinely 50-75% fat based depending on season; the Inuit diet is high in fats that are monounsaturated and very high in Omega-3. Unless someone is eating wild caught seal/fish/walrus, it's going to be much higher in saturated fats, which is very common in Western diets and unhealthy.
The Inuit diet also varies from 50-75% fat depending on season, the diet described in the question is a straight 65-70% from fat daily. And, while the Inuit may not have the health problems most commonly related to high fat intake, they do suffer from obesity, which negates the weight loss that is desired.